Analysis
Palladium has consolidated sideways in recent days but the 20 DMA continues to act as a support, signalling that sentiment is resilient. Against this, we retain our constructive stance over the very short term (around one month).
Taking a longer-term perspective, our monthly chart shows the technical picture remains fairly bullish, with an upward-sloping key MMA.
On the upside, we see the next key resistance level at the current 2017 high. On the downside, a firm break below the 20 DMA would suggest sentiment is worsening, resulting in additional selling pressure towards the 50 DMA, the 100 DMA, the 200 DMA and, ultimately, the UTL.
Macro drivers
Palladium is the most resilient precious metal so far this week. While the white metal is about flat week-on-week, gold and platinum are under intense selling pressure from growing expectations of an imminent US rate increase.
Palladium outperforms thanks to its stronger correlation with risk assets such as equities. Indeed, as an industrial metal, palladium is supported by the robust economic backdrop, evidenced by the positive economic data both in advanced and emerging economies.
On the macro front, investors will pay close attention Fed chair Janet Yellen’s speech at the Executives Club of Chicago on Friday March 3 where she will discuss the US economic outlook. This may trigger a further improvement in global risk appetite, which should induce money managers to stay overweight palladium comapred with its peers.
Investment and speculative flows:
ETF investors were quiet in February, lifting their holdings just by 1,729 oz or 0.1%, after liquidating a massive 169,000 oz or 10% in January. This could suggest a positive change in sentiment.
Speculators slightly deleveraged over February 14-21, the latest COT statistics show. Looking ahead, we think speculative positioning may deteriorate in the weeks ahead once risk aversion resumes. But because palladium is a precious metal, the fluctuations in gold prices may influence speculative behaviour in palladium. So our constructive view on gold for the first quarter leads us not be aggressively bearish on palladium.
Supply/demand balance:
Johnson Matthey revised its forecast for the global palladium market lower in November 2016. It now sees it in a deficit of 651,000 oz in 2016 compared with the 843,000-oz deficit it projected in May.
Conclusion
We remain friendly toward palladium over the very short term because we see the recent higher yearly high as signalling that the uptrend will continue. But given the volatile nature of the palladium market, we cannot rule out a strong sell-off in prices if risk aversion picks up, which is likely considering the unsustainable risk rally. A firm break below $700 per oz would force us to reassess.
We remain constructive over the short and medium terms (i.e. for the first half of 2017) because palladium should get support from a broad-based rally across the precious metals, which we expect during the rest of the first quarter from stronger demand for safe-haven assets. Still, we think that palladium may underperform given its relatively higher correlation with risky assets than that of gold or platinum.
For more details, please see our January spotlight.
